Price Levels and Inflation/Deflation

Question 1

Identify three common price indices.

Answer 1

1) Consumer Price Index (CPI)
2) Purchase Price Index (PPI)
3) Personal Consumption Expenditure Price Index (PECPI)
4) Gross Domestic Product (GDP) Deflator

Question 2

What causes demand-induced (or demand-pull) inflation?

Answer 2

Aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.

Question 3

What causes supply-induced (or cost-push or supply-push) inflation?

Answer 3

Increases in the cost of inputs to the production process that are passed on to the final buyers in the form of higher prices.

Question 4

What are the consequences of inflation?

Answer 4

• Lower current wealth and lower future real income
• Higher interest rates
• Uncertainty of economic measures

Question 5

Define “price indexes (or indices).”

Answer 5

Factors that converts prices of each period to what those prices would be in terms of prices of a specific prior (or subsequent) reference period.

Question 6

Define “inflation” and “deflation”.

Answer 6

• Inflation = Rate of increase in the price level.
• Deflation = Rate of decrease in the price level.

In the U.S., inflation and deflation are most commonly measured by the CPI-U.